Description
CV Therapeutics is a biotech company with a recently FDA-approved drug on the market for second-line treatment of angina, the first new treatment in over 25 years.
Our valuation of the company is $40 per diluted share based on probable Ranexa approval as angina monotherapy in 2007, offering a return of over 150% from today’s prices.
CVTX represents a special situation opportunity. It has been sold down along with the whole biotech sector, i.e. the BBH is down 10% YTD. While not a value investment in the traditional sense, it is trading at value levels relative to the biotech sector as well as to its future cash flows.
Company background:
CVT was founded in 1991 with VC money by Louis Lange, Ph.D., M.D. and is focused on the development and marketing of small molecule cardiovascular compounds. Dr. Lange is a renowned cardiologist who became head of cardiology at a major St. Louis hospital at the age of 35.
Company specialization:
CVT’s cardiology focus has several commercial advantages.
One, the focus on cardiology means CVT is pointed at one of the largest patient populations. The AHA says from 6 to 15 million Americans suffer from chronic angina and over 550,000 patients are hospitalized with heart attacks each year.
Two, CVT has major thought leadership behind it. The label expansion study for Ranexa is being lead by the influential Dr. Eugene Braunwald of Harvard and executed by the TIMI Study Group of Harvard. Dr. Braunwald is the editor of the leading internal medicine textbook and founding editor of the leading cardiology textbook, and is the only cardiologist who is a member of the National Academy of Sciences among other distinctions.
The leading cardiologist prescribers are concentrated in clinics. CVT can cover the top 5 decile of cardiologist prescribers, which is only 21,000 doctors, with 250 account reps. The top decile of prescribers represents 1500 cardiologists who write the same amount of prescriptions as the bottom decile of 141,000 cardios and GP’s.
Three, the cardiac conditions CVTX addresses are chronic and treated indefinitely.
Four, the focus on cardiology will provide strong operating leverage when CVT crosses financial breakeven. It also makes the company more attractive to acquire and cheaper to integrate to a trade acquirer with the same focus.
Ranexa:
Ranexa pricing is $5.50/day and adjusted for non-compliance we assume revenue of $1500/year per patient. The market size is segmented from the smallest to largest scenarios beginning with the most refractory patients up to the entire first-line angina population. There are 6.1 million to 15M chronic angina sufferers in US according to the AHA and the ACC, of which around 10% are refractory. Expansion into the broader population and onto Tier 2 formularies is dependent upon MERLIN safety data as explained later. Uptake as a second-line drug will be limited by the higher Tier 3 co-pays of $30 to $50.
1. 20,000 refractory angina patients undergoing undergoing EECP are the lowest hanging fruit: $30 million
These patients have proven untreatable by conventional medicines and PCI (angioplasty/stenting) and are willing to pay for an expensive and time-consuming therapy. A series of 35 EECP treatments is priced at $4500 to $6000 and offers a low ROI to cardios. These cardios will be willing to embrace a new drug option.
2. 1 million angina patients on three or more medicines: $975M
As noted there are 650k to 1.5M refractory cases in total. Thus the low end of the refractory market estimates is $975M. The high end, $2.25B.
3. 930,000 refractory angina patients are in Europe and Japan. CVT is expected to perform several additional small pharmokinetic studies and apply for EU approval this year.
4: The second line therapy is calcium blockers. The US market is $4.8B or 15M prescriptions per year ($320/prescription)
5. If MERLIN is successful and Ranexa is approved for first line therapy, the total addressable US angina market is 40M prescriptions per year for 7M patients. Beta blockers are the standard of care.
6. Contraindications of current therapies: Patients with diabetes, asthma, bronchitis and emphysema, congestive heart failure, and 2nd degree heart block all have major safety issues with beta blockers. 30% of all angina sufferers have diabetes, and 15% have chronic lung disease such as emphysema and chronic bronchitis. Diabetics generally have stiffened blood vessels and are sensitive to current therapies since beta blockers lower heart rate and affect blood pressure and blood sugar. Cardiologists find it very difficult to manage these interactions. Since Ranexa has shown no effect on heart rate or blood pressure it has potential to become the standard of care in this population. MERLIN has also been powered to find secondary effects on diabetes. These groups are subsets of numbers 2, 3 and 4 above and should be viewed additional channels towards penetration as a second-line therapy.
Regadenoson:
This next-generation myocardial perfusion imaging drug in Phase III trials is licensed to Astellas which is paying 75% of the development cost and all commercialization costs. The drug shows better tolerability and equal performance to Adenoscan which is the market leader sold by Astellas today. Adenoscan does over $300M per year, grows in double digits and goes off patent in 2008. Regadeonoson increases turnover and profitability in the cath lab as it is injected whereas Adenoscan must be administered with a six-minute pump infusion incurring lab and pump costs. Adenoscan is contraindicated against asthma, sinus disease and AV block whereas Regadenoson should not be. Therefore, we expect Regadenoson to displace generic Adenoscan in the market when it goes off patent in 2009. Data from the second pivotal study is expected in early 2007 along with an NDA filing. We model growth to $400M in sales in 2010 at a 20% royalty to CVT for $80M per year in 100% accretive royalties, growing until patent expiry in 2019. The baseline is conservative given the current $20M per quarter King Pharmaceuticals collects from Astellas for Adenoscan royalties.
Valuation:
We use a revenue multiple to value the stock as is common in biotech. 4x is near the low end of valuations for companies with approved drugs and often run much higher. This approach is justified given the patent-protected 80%+ gross margins and very high operating leverage.
A. With 1st-line angina approval for Ranexa, and Regadenson approval: $41/share
1st- line approval would put Ranexa on Tier 2 formularies and reduce the required co-pay, accelerating adoption.
2008
Ranexa patients 500k
Ranexa revs $750M
Gross profit $562M
SG&A+Capex-D&A $323M
Ranexa FCF $239M
Regadenoson revs $40M
Total Revs $790M
Revenue Multiple 4x
Future Equity Value $3.16B
Debt (100M)
Future EV $3.060B
Diluted Shares 66.1M
2007 Share Price 46
Discount 15% 40
Gross margins are 82.5% and royalties paid 7.5%, cash burn is $494M thru 2007 offset by current cash balance and assumed issuance of 6M shares of stock for $100M. The company will have more than $1B in federal NOL’s by 2008.
B. With 2nd-line angina approval only for Ranexa, and Regadenoson: $25/share
Although we believe Ranexa will be approved for first-line therapy as it has already proven safe in 3 other trials (one of which was monotherapy), we model a slower growth model in the event that the FDA does not approve Ranexa for monotherapy. Using the same launch assumptions, we believe an average 300k patients or 4% of US angina patients will be on drug in 2008 generating $450M in Ranexa revenues.
2008
Ranexa Revs 494M
Revenue Multiple 4x
Future Equity Value 1.97B
Debt (100M)
Future EV 1.875B
Diluted Shares 66.1M
2007 Share Price 29
Discount 15% 25
C. Upside scenarios:
1. Ranexa ACS approval (1.5M patients) and off-label usage.
2. CVT has three other clinical drugs and several preclinical programs which may have value. None are ascribed option value in our analysis.
3. Aceon: CVTX co-promotes Solvay’s ACE inhibitor Aceon to cardios for hypertension and ACS as a method to train its sales force. CVTX collects 55% of the upside to the pre-existing revenues from the GP channel. CVTX collected $700k last quarter in co-promote revenue. The drug launch has been slow due to general perception of class efficacy for ACE inhibitors. This co-promote revenue is not valued in our analysis, but could surprise small to the upside.
4. Pharma buyout: Big Pharma has a spate of drugs coming off patent in the next few years and are shopping for acquisitions in the biotech space to fill their pipelines. Buyouts typically happen at 4 to 6x peak revenues for drugs early in patent. Ranexa and Regadenoson have patent protection until 2019. We believe peak revenues are in excess of $1.5B for Ranexa, implying even higher values for the company in a takeover.
Capital Structure:
Projected Diluted Shares Outstanding
46.1M basic shares
5.5 M shares converted from 3.25% 7/1/13 debentures at $27
8.5 M shares converted from 2.75% 5/16/12 converts at $17.68
6.0 M share issuance under Azimuth CEFF at 16.67/share
$100M of converts struck at $47.58 represent the remaining 2008 debt.
Mgt options, restricted stock, SAR’s and warrants outstanding total 10.044M shares. We assume no exercise and resultant cash inflow or dilution in our valuation.
Background on angina and standard therapies:
Angina is debilitating and pain and pressure in the chest caused by a deficit of oxygen flow to the heart, which can also lead to a heart attack. Ranexa (ranolazine) is the first new drug approved for angina in more than 25 years and has a novel mechanism of action which blocks the sodium current to the heart, which increases heart wall flexibility and decreases oxygen consumption.
In patients already on standard drug therapies, Ranexa has demonstrated reductions in angina frequency and nitroglycerine usage, as well as increases in exercise duration. In monotherapy trials the reduction in angina frequency demonstrated is even greater.
The need for a new class of angina therapy stems in part from quality of life and drug interaction issues under current therapies. Current drugs slow heart rate and lower blood pressure. Beta blockers are effective as first-line angina therapies and improve outcomes but come with a number of side effects affecting quality of life including fatigue, and shortness of breath and are contraindicated in several major associated conditions. Calcium channel blockers such as generic Norvasc dilute blood vessels to reduce the heart’s workload but have no angina data and have shown several side effects. Long-acting nitrates such as Imdur come with side effects such as severe headache and swelling and also lack outcomes as well as any angina clinical data. ACE inhibitors which do improve outcomes lower blood pressure as well. Since refractory angina patients are often on 6 or more drugs, there is a clinical need for an angina drug with a different mechanism of action other than lowering heart rate or blood pressure in order to manage drug interactions.
Finally angina is expensive. Intuitively the reduction of angina frequency should be of great importance to managed care orgs since coronary artery disease patients with angina use the emergency room often and at great cost. In fact, angina patients use ER more than three times as often as those without it according to a recent study by CVT and an MCO. The study pegs patients with angina attacks as costing $16k more per year than coronary artery disease patients without angina attacks.
Ranexa launch:
IMS reported that in its 7th week on the market total Ranexa Rx grew sequentially 13.7% to 449. A separate daily audit shows 598 Rx for the week of May 12. However, this number is not meaningful so early into the launch looking at more qualitative factors. CVT says that 1000 doctors have already sampled the drug with good feedback and stories coming from the cardio centers. The company also says it will have 500 cardiologists in its speaker program by June. Anecdotes from the company and analysts indicate that feedback is good from cardiologists who have prescribed the drug but that awareness is still low, something that can be cured by the network effect among cardiologists and via marketing.
Risks:
This section is generally very large for biotechs. Risks for CVTX include failure to effectively promote Ranexa, the discovery of safety issues in MERLIN or in the launch to second line patients, difficulty getting onto Tier 2 formulary reimbursement schedules, the failure of Regadenoson in the last pivotal trial, incremental dilution if Ranexa uptake does not meet our expectations, and risk to more dilution from CVT’s latest CEFF with Azimuth of up to $200M as cash burn is to be over $300M this year. There are many other risks as with all biotechs. However as NBIX and many other biotechs have demonstrated this year the biggest risk FDA rejection and CVTX has passed a major hurdle into the rarified world of biotechs with approved drugs.
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Note on the MERLIN Study:
This 6500-subject study is being performed under a Special Protocol Assessment (SPA) which is a binding agreement with the FDA. MERLIN studies Ranexa as in the acute cardiac care setting. Endpoints are time to angina, heart attack and mortality beginning with IV usage in acute settings followed by 11 months of oral dosing. The trial is powered to address Ranexa’s efficacy in other conditions associated with coronary artery disease such as arrhythmia, congestive heart failure and even potentially diabetes. This Phase III data is due in Q4 of this year. Failure to meet endpoint but a positive safety result showing no effect on arrhythmia increased mortality should ensure that Ranexa will be approved as angina monotherapy. Meeting of endpoints could lead to approval in acute coronary syndrome and wide off label adoption. Given that Ranexa has shown no increased mortality or coronary events in the other two late stage studies, we believe the study will show no safety issues and enable Ranexa’s approval for angina monotherapy.
Bears state that the increase of enrollment from 5500 to 6500 and extension of the study due to a dearth of mortalities shows the studies population is already too medicated. We disagree, and believe the study’s enrollment extension potentially indicates Ranexa’s efficacy in cardiac outcomes and at a minimum. reassures as to the safety of the drug
From CVT’s 2004 PR announcing MERLIN enrollment:
Under the SPA agreement, if statistical significance on the primary
endpoint is achieved, Ranexa could gain approval for hospital-based treatment of ACS and for long-term prevention of ACS in patients that present at the hospital with ACS and are treated and discharged.
Importantly, under the same SPA agreement, if treatment with Ranexa is not associated with an adverse trend in death or arrhythmia compared to placebo, the large safety database could support potential approval of Ranexa as first-line chronic angina therapy, even if statistical significance on the primary endpoint is not achieved. As part of this SPA agreement, CV Therapeutics also has committed to perform a separate clinical evaluation of higher doses of Ranexa to support potential use as first-line therapy for chronic angina.
In general, these assessments are considered binding on the
FDA as well as the sponsor unless public health concerns unrecognized at the time the SPA is entered into become evident or other new scientific concerns regarding product safety or efficacy arise.
Catalyst
- Approach of MERLIN data release in late 2006/early 2007
- Regadenoson approval in 2008
- Improving uptake in second line therapy
- Buyout of biotechs by big pharma/improving sentiment in the space.